The Committee on Capital Markets Regulation has issued its interim report. While there is no call for an abolition of private securities litigation (as had been suggested in the media), the report does contain a number of findings and recommendations regarding securities class actions that are likely to be controversial.
The basic premise of the "Civil Enforcement" section (pp. 74-84) is that the "public value of the securities class action litigation is questionable." The Committee cites three reasons for this conclusion. First, "virtually all of the costs" of securities class actions fall on the corporation and its insurers, which means they are ultimately borne by the shareholders. Second, securities class actions do a poor job of compensating investors (average settlement of "between two percent and three percent of the investors’ economic losses") and there are high transactions costs (attorney fees, business disruption, etc.). Finally, any recovery is "largely paid by diversified shareholders to diversified shareholders and thus represents a pocket-shifting wealth transfer that compensates no one in any meaningful sense." (More on the issue of diversified shareholders and securities litigation can be found here.)
In keeping with this assessment, the Committee recommends that the SEC: (1) resolve certain judicial conflicts over Rule 10b-5 liability; (2) limit the amount of damages recoverable in private litigation when it has already provided investor compensation; and (3) encourage courts (perhaps with the assistance of new legislation) to stop pay-to-play practices in which plaintiffs’ firms make political contributions in exchange for lead counsel positions. In particular:
Materiality - The SEC should clarify whether a misstatement can be material if its disclosure does not have an "effect on the market," thereby resolving a circuit split between the 9th Circuit (yes) and the 3rd Circuit (no).
Scienter – The SEC should clarify whether the fraudulent intent (i.e., scienter) element of a securities fraud claim can be demons